When starting a business in Maryland, one of the most important decisions is choosing the right legal structure. Two of the most common options are the Limited Liability Company (LLC) and the corporation. Both provide liability protection and business credibility, but they differ in management, taxation, and compliance requirements. Understanding these differences helps entrepreneurs make informed decisions that align with their goals.
What is a Limited Liability Company (LLC)?
An LLC is a flexible business structure that combines the liability protection of a corporation with the simplicity of a partnership. It is popular among small business owners because of its ease of formation, management flexibility, and favorable tax treatment.
Key features of an LLC:
Liability Protection – Owners, called members, are not personally liable for company debts or obligations.
Management Options – Can be member-managed (run by owners) or manager-managed (appointing non-owners to run operations).
Pass-Through Taxation – Profits and losses are reported on members’ personal tax returns, avoiding corporate double taxation.
Fewer Formalities – LLCs do not require annual meetings or corporate minutes.
What is a Corporation?
A corporation is a separate legal entity owned by shareholders. It offers strong liability protection and is often used by businesses that plan to grow significantly or seek outside investment.
Key features of a corporation:
Shareholders and Directors – Shareholders own the company, while a board of directors manages governance.
Stock Options – Corporations can issue shares, making it easier to attract investors.
Tax Treatment – C-Corporations face double taxation, but S-Corporations allow profits to pass through to shareholders.
Formal Requirements – Corporations must adopt bylaws, hold annual meetings, and keep detailed records.
LLC vs Corporation: Key Differences
1. Ownership and Management
LLC – Owned by members, with flexible management structures.
Corporation – Owned by shareholders, managed by a board of directors and officers.
2. Taxation
LLC – Default pass-through taxation, but members can elect corporate taxation if advantageous.
Corporation – C-Corps face double taxation, while S-Corps allow profits and losses to flow through to shareholders.
3. Formality and Compliance
LLC – Fewer reporting requirements and less rigid governance.
Corporation – Requires annual meetings, minutes, and more paperwork.
4. Raising Capital
LLC – Raising money can be more difficult since LLCs cannot issue stock.
Corporation – Attractive to investors due to stock issuance and established structure.
5. Longevity and Transferability
LLC – May dissolve when members leave unless otherwise specified in the operating agreement.
Corporation – Exists perpetually, and ownership can be easily transferred through stock sales.
Choosing the Right Structure
When deciding between an LLC and a corporation, consider the following:
Size and Growth Plans – Small businesses often benefit from the simplicity of an LLC, while corporations suit larger or fast-growing companies.
Tax Preferences – LLCs offer flexibility, while corporations may be more favorable for businesses seeking reinvestment.
Funding Needs – If attracting investors is a priority, a corporation may be the better choice.
Compliance Comfort – Entrepreneurs who prefer minimal formalities may lean toward an LLC.
Steps to Form an LLC or Corporation in Maryland
Choose a Business Name – Must be unique and comply with Maryland naming requirements.
File Organizational Documents – Articles of Organization for LLCs, Articles of Incorporation for corporations.
Appoint a Registered Agent – Required to receive legal and official notices.
Draft Governing Documents – Operating Agreement for LLCs, Bylaws for corporations.
Obtain an EIN – Required for tax filings and opening business bank accounts.
Register for Taxes and Licenses – Depending on business type and location.
Professional Legal Guidance
While both LLCs and corporations can be formed online, professional legal guidance ensures compliance with Maryland law and helps avoid costly mistakes. From selecting the best entity type to drafting customized governing documents, attorney-led support provides clarity and peace of mind.
Conclusion
Both LLCs and corporations offer liability protection and legitimacy, but they serve different business needs. An LLC provides flexibility, simplicity, and favorable taxation for small to mid-sized businesses. A corporation offers structure, growth potential, and investment opportunities for larger or expanding companies. By weighing goals, tax considerations, and long-term plans, entrepreneurs can choose the structure that best supports their success.